Special attention was paid to the booming Russian innovation and venture scene and its globalization last week at Journey 2013, an event organized by Ernst & Young in Tel Aviv. A “Journey Into Russia” roundtable presented Russia’s high tech scene to several key representatives of the Israeli and global venture capital community in attendance.
Professor Eugene Kandel, Head of the National Economic Council at Israel’s Prime Minister’s Office opened the round table with a historical perspective and humorous remarks, and in perfect Russian. “When I emigrated to Israel from the Soviet Union in the 1970s, I dreamt of a day when I could meet my former Russian compatriots using terms like ‘capital’ or ‘entrepreneurship.’ This has come true today, and I guess that Karl Marx is rolling over in his grave.”
“Israel is the most intensive country for innovation per inhabitant,” Kandel continued. “But it is a very small market, so external relations are essential. Traditionally we’ve cooperated with Western Europe and the USA, but now we seek diversification as a kind of ‘risk management’ strategy for the country and its innovation industry as technologies now spread around the world.”
“While the Chinese are of growing interest to us, we consider it is very important to cooperate with Russia – not only as an investor,” the Israeli official concluded in a reference to the growing capital flow from Russia into tech companies across the globe, “but also as a strategic partner for a range of technologies, from IT to clean tech.”
“As was the case in Israel 20 years ago, global VCs look for trusted access points into an emerging market such as Russia,” said E&Y partner Noam Canetti. “Those access points may be local investors with whom the global investors build long term relationships and feel comfortable co-investing with. For this purpose, we gathered prominent representatives of leading venture capital firms from Russia, Israel, the US and Europe, as well as representatives of leading Russian high tech companies for an open discussion.”
Among these Russian representatives were leading VCs Alexander Galitsky of Almaz Capital, Maxim Krasnykh and Igor Taber of Intel Capital, serial entrepreneur and investor Sergey Beloussov, Game Insight founder Alisa Chumachenko.
Even though international VCs show a growing interest in Russia, their enthusiasm is still far from overwhelming, noted Beloussov, who is raising a new fund of “perhaps a couple of hundred million dollars.” Potential LPs prefer a global orientation to a Russia-only focus, he noted.
Beloussov’s first fund, Runa Capital, launched in 2011 as a Russia-focused fund, is now operating globally.
From HR costs to globalization challenges
Regarding the general environment for doing business in Russia, Beloussov, who founded several globalized tech companies, including software publisher Parallels, said: “High tech businesses do not live in a country’s environment, they operate according to the industry’s trends and issues.”
“Now it is easy to create a company and raise funds in Russia, but there are huge issues with talents. The time when you could develop a software company by paying a programmer $15k per year versus $200k in California is over,” Beloussov added.
Chumachenko, whose company Game Insight stands as one of the most successful and globalized Russian startups of the last years, disagreed. “We still enjoy low HR costs in Russia, which explains in part our strong financial performance,” she indicated.
Onetwotrip is another example of a Russian startup operating internationally. This innovative online air ticket booking agency has no fewer than six languages available on its website. It is now considering expansion to new markets, including some Asian countries, said Mikhail Sokolov, one of the startup’s top executives.
However, international expansion is much more difficult in physical e-commerce: the initiatives of Lamoda.ru or Ozon.ru in Kazakhstan being the exception rather than the rule, noted Sokolov.
The internationalization attempts of Yandex and the Mail.ru Group have not been very successful either, in spite of their introductions on Western stock exchanges in 2011 and 2010, respectively.
